States expand low-interest loan programs for farms, businesses and new housing

JEFFERSON CITY, Mo. — On the first business day of the new year, Missouri Treasurer Vivek Malek began accepting applications for about $120 million in state-subsidized, low-interest loans to small businesses, farmers and affordable housing developers.

Within six hours, Malek had so many requests for the money that he had to stop the requests.

“The demand is huge, and it is real,” Malek said.

The situation in Missouri, while extreme, is not entirely unique. From New York to Illinois and Montana, states have seen growing public interest in little-known programs that use state funds to spur private investment with low-cost loans. The programs started after a series of major interest rate hikes by the Federal Reserve made virtually all lending more expansive, whether to farmers buying seed or businesses looking to expand.

To combat consumer price inflation, the Fed raised its key interest rate 11 times from March 2022 to July last year, leaving it at a 20-year high.

Under so-called linked-deposit programs, states deposit money with banks at below-market interest rates. Banks then use these funds to provide short-term, low-interest loans to certain borrowers, often in agriculture or small businesses. The programs can save thousands of dollars for borrowers by lowering their interest rates by an average of 2 to 3 percentage points.

States typically limit the amount of money available for such discounted rates to a fixed dollar amount or to a percentage of their total fund balance because the programs result in less revenue for the state. Many states have built large surpluses from pandemic-era revenues, meaning they have more money available to deposit in banks.

While most states do not currently offer such programs, some who shelved them when interest rates were low are now considering whether to revive them to help businesses and residents in financial need.

“I can say in conversations with other state lenders that there is a definite increased interest in Treasury money, whether that’s through a linked deposit program or through some other vehicle,” said Illinois Treasurer Michael Frerichs, president of the National Association of State Treasurers.

Illinois has nearly $950 million in deposits tied to low-interest loans for farmers, businesses and individuals. That is considerably more than in previous years. In 2015, Frerichs said, the state’s agricultural investment program had only two low-interest loans. By 2022, that had grown to $51 million in loans. Last year, Illinois made $667 million in low-interest agricultural loan deposits.

Due to rising demand, Frerichs recently increased the total limit of the program from $1 billion to $1.5 billion.

Although the New York program was smaller in size, it also saw an explosion in enrollments.

In 2022, New York had 42 applications for state deposits at financial institutions tied to $20 million in low-interest loans. Last year, that rose to 317 applications tied to more than $220 million in loans, said Rafael Salaberrios, a senior vice president who manages capital access programs at Empire State Development, New York’s economic development agency.

“Because the banks see the benefit, they are flooding us with applications – and that’s a good thing,” Salaberrios said. He added: “The linked deposit has allowed small business growth to continue even in these high (interest rate) environments.”

Due to rising demand, Missouri’s linked deposit loan program approached its statutory limit of $800 million last May. After some existing loans expired, the treasurer’s office was able to reopen applications at 10 a.m. on Jan. 2. By 4pm that day, it had reached the limit again (142 applications had been received for a total of more than $119 million) and the application window closed.

About half of the applications came on behalf of customers from just two financial institutions: OakStar Bank and FCS Financial, a leading agricultural lender. FCS Financial had more than 100 additional applications lined up to submit when applications were halted, said Brian Zimmerschied, vice president of the commercial crop lending team.

BTC Bank in rural Bethany, Missouri, planned to submit a dozen applications on behalf of its customers. But it failed completely because of the quick shutdown, said bank CEO Doug Fish.

Among those left disappointed was Jason Bernard, a farmer near Bethany who had hoped for a low-interest loan to buy this year’s supply of seed, fertilizer and chemical sprays.

With higher interest rates, “it’s a lot harder to make it just because of your payments,” Bernard said.

The Missouri Treasurer’s office is backing legislation to increase the program’s cap from $800 million to $1.2 billion, which would represent a 50% increase in capacity. The expansion could cost the state $12 million in potential revenue, but that could be partially offset by the economic activity generated by these loans, a budget analysis from the Legislature shows.

In Montana, lawmakers last year approved a new program to address the affordable housing shortage. The Montana Board of Investments launched a linked deposit lending initiative in October, which received $77 million in applications within two months, hitting a self-imposed limit and forcing applications to close earlier than expected.

Republican state Rep. Mike Hopkins, who sponsored the housing stimulus legislation, was thrilled with the response.

“We are in a bit of a bind in the state of Montana” when it comes to affordable housing, Hopkins said, and “we were able to get money out the door as quickly as possible.”

Officials in Iowa, Kansas and Ohio also told the AP that they had increased demand for programs that deposit state money into banks to make low-interest loans. The number of recipients of such loans in Kansas has tripled between 2022 and 2023. In Ohio, the amount of money provided for these loans increased by two-thirds in that time to more than $600 million.

Oklahoma’s linked deposit program has been inactive since 2010 due to low interest rates, but at least two banks recently contacted the treasurer’s office about the possibility of restarting it, according to Deputy Treasurer Jordan Harvey.

Texas Agriculture Commissioner Sid Miller said he had not approved any linked deposits for low-interest loans since taking office in 2015 — until last year, when he approved his first two.

“There wasn’t much need for it because interest rates were cheap,” Miller said.

“But now that rates have gone up,” Miller added, “it could be a viable program, and we could help some people.”